On 16 December 2024, the European Union adopted its 15th package of sanctions against Russia, including provisions for protecting EU companies against Russian court decisions. Courts in EU Member States are now prohibited from ordering enforcement of Russian court judgments issued on the basis of Article 248 of the Russian Arbitrazh Procedural Code. Russian courts have recently been claiming exclusive jurisdiction in disputes between Russian and EU companies on the basis of this provision, even when the parties have concluded arbitration or choice of forum clauses specifying the jurisdiction of a foreign court or arbitral tribunal. In addition to exercising jurisdiction, Russian courts have issued anti-suit or anti-arbitration injunctions against non-Russian parties prohibiting them from conducting court or arbitral proceedings outside Russia – with violations subject to heavy fines. The EU seeks to counter these practices by adopting provisions to protect German and other EU companies against the enforcement of Russian judgments in the European Union.
Summary
- The EU’s 15th sanctions package prohibits the enforcement of judgments in which Russian courts claim jurisdiction under Article 248 of the Russian Arbitrazh Procedural Code.
- The EU’s 15th sanctions package does not fundamentally protect European companies from judgments being enforced outside the EU, or from Russian arbitral awards being enforced inside or outside the EU.
- How EU companies can protect themselves against enforcement of Russian judgments not based on Article 248 of the Russian Arbitrazh Procedural Code and against Russian arbitral awards depends on the specific case in question. In the event of a looming dispute involving Russia, early consideration should be given to how to prevent enforcement of a Russian court judgment or arbitral award.
EU sanctions
Since the beginning of the Russian war against Ukraine, the situation that companies headquartered in an EU Member State (“EU companies”) face in Russian courts has deteriorated to such an extent that the EU has found itself forced to take countermeasures in its 15th sanctions package against Russia. The sanctions package is the latest in a series of EU sanctions packages adopted since Russia’s annexation of Crimea (see for example our regular sanctions updates on the recent 12th sanctions package, 13th sanctions package and 14th sanctions package). The 15th sanctions package also contains additional adjustments, clarifications and some entirely new sanctions in addition to the protections against the enforcement of Russian judgments (see our article of 18 December 2024).
Why do European companies need protection?
Russia obviously does not recognise EU sanctions, and therefore has an interest in having Russian courts rule on matters affected by these. Russia already introduced Article 248 of the Russian Arbitrazh Procedural Code in 2020 in response to EU sanctions imposed due to Russia’s annexation of Crimea. This article is aimed at preventing non-Russian parties from conducting their commercial disputes – especially where these involve matters affected by sanctions – with Russian parties before foreign courts or arbitral tribunals, even where the parties previously agreed to do so. Accordingly, Russian courts may on request issue anti-suit or anti-arbitration injunctions requiring foreign parties to refrain from bringing or continuing their action before a foreign court or arbitral tribunal. Should the foreign party fail to comply, the Russian party may apply for a fine of up to the amount in dispute in the prohibited proceedings, which is to be paid directly to it.
These court decisions put EU companies in a difficult position, as they may be ordered in Russia to fulfil obligations that they are prohibited from fulfilling under EU law and the sanctions regime. Violating sanctions can lead to heavy fines and criminal or administrative proceedings may even be brought against the individuals involved. At the same time, EU companies cannot assert claims against Russian (former) business partners outside Russia or proceed with ongoing legal actions without the risk of being fined in Russia. While these fines are likely to be mainly enforced against assets in Russia, it cannot be ruled out, at least in theory, that enforcement could take place in other countries outside the EU.
The protection offered by the 15th sanctions package
Article 11c(1) of Regulation 833/2014, introduced as part of the 15th sanctions package, aims to provide redress by prohibiting EU courts from enforcing judgments in which the jurisdiction of Russian courts was established via or in connection with Article 248 of the Russian Arbitrazh Procedural Code. In this way, the EU wants to block the enforcement of Russian court rulings in cases where Russian courts have claimed jurisdiction despite the parties having agreed on – or international civil procedure law stipulating – the jurisdiction of a foreign court or arbitral tribunal.
Where and how might Russian court rulings be enforced?
Russian court rulings unrelated to Article 248 of the Russian Arbitrazh Procedural Code can still generally be recognised in the EU. Each EU Member State determines, based on its regulations for recognising foreign judgments (or international agreements), whether it will recognise Russian judgments. Russian court rulings are generally not recognised by German courts because the necessary reciprocity is not guaranteed.
EU companies nevertheless still risk having Russian court rulings, in particular those based on Article 248 of the Russian Arbitrazh Procedural Code, enforced against them both in Russia itself and in other countries outside the EU (“third countries”). The most effective protection against enforcement is, of course, not to have any assets at a location where they could be seized. However, in the global market, EU companies with international operations will often find it impossible to move assets out of all third countries in which a Russian company could potentially initiate enforcement proceedings. The resulting financial damage is likely to be significantly greater in the long term than the damage caused by the enforcement. Depending on the individual case, the risk of possible enforcement proceedings in various jurisdictions can be reduced by taking suitable precautions when drafting contracts or structuring companies.
Recognition and enforcement of arbitral awards
A common and more problematic case we regularly see in our practice is where the parties have concluded an arbitration agreement with a place of arbitration in Russia. Depending on the arbitral institution and the associated composition of the arbitral tribunal, a tribunal may be formed that does not recognise EU sanctions and accordingly orders an EU company to render performance in violation of these. Unlike Russian court judgments, such arbitral awards are enforceable more or less worldwide. Pursuant to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards of 1958 (“New York Convention”), the 172 contracting states, including Germany, have agreed to recognise foreign arbitral awards and declare them enforceable.
Under the New York Convention, recognition and enforcement of a foreign arbitral award may only be refused in exceptional cases, for example if this would be contrary to public policy. Recognising and enforcing an arbitral award that violates EU sanctions will most likely be clearly contrary to public policy in Germany and other EU Member States. The rationale underlying the 15th sanctions package’s measure refusing EU recognition for Russian judgments if they contravene EU sanctions is a further indication that arbitral awards that violate EU sanctions are also contrary to public policy. Third countries that may not have imposed sanctions on Russia could see things differently.
It would in any case make sense for parties to arbitral proceedings to focus their strategy on preserving any defences against the later enforcement of the arbitral award even before the proceedings have come to an end. The first step is to explain as clearly as possible to a Russian arbitral tribunal (as well as for the benefit of any EU court responsible for enforcement) that the goods, services, etc. at issue are in fact covered by the extensive and not always transparent EU sanctions lists. It may be helpful to submit an official decision, such as an export ban, but this can be difficult to obtain given the heavy caseload of the authorities concerned. Recognition and enforcement may also be refused if, for example, procedural errors were made in the arbitration proceedings and not rectified despite an objection being filed in good time. The right to be heard may moreover be violated if an arbitral tribunal fails to consider the substantiated argument that a certain performance could not be rendered because of sanctions.
Summary and outlook
EU companies involved in commercial disputes with Russian companies are still in a difficult position. With its 15th sanctions package, the EU has taken measures to protect EU companies against the enforcement of Russian court judgments that undermine choice of forum and arbitration agreements and are ultimately aimed at circumventing the EU’s economic sanctions. Although this benefits EU companies within the EU, it does not preclude potential enforcement against assets in Russia or third countries. The latest sanctions package also offers no protection against the enforcement of Russian arbitral awards, but does provide further indications that Russian failure to recognise EU sanctions is to be deemed contrary to public policy in the EU.
The EU has therefore established a mechanism that significantly improves the legal position of EU companies, but – given the complexity of international regulations and specific circumstances of each individual case – cannot provide all affected EU companies with fully effective protection. Businesses must accordingly continue to closely monitor not only changes in Russian legislation and case law, but also legal developments in third countries. And if faced with an impending legal dispute with a Russian company, they must consider where the court judgment or arbitral award might be enforced and develop a strategy to prevent the other party from gaining access to their assets during enforcement.
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